The nation of Pecunia had a current account

a.What was the balance of payments of Pecunia in that year? What happened to the country’s net foreign assets?

Ans. –The balance of payments is a colloquial name for the official settlements balance, the difference between the current account and the non-reserve financial account. Given that the balance of payments identity tells us that the balance of payments =CA + FA (nonreserve) =-$500 million. The central bank must “export” some of its reserves (either foreign or domestic) to cover the current account deficit. Net foreign assets must have fallen by $1 billion.

b.    Assume that foreign central banks neither buy nor sell Pecunian assets. How did the Pecunian central bank’s foreign reserves change in 2016? How would this official intervention show up in the balance of payments accounts of Pecunia?

Ans. – Given that foreign central banks do not want domestic reserve assets, the central bank must have had its foreign reserves fall by $500 million. It shows up in the balance of payments as explained in part a).

c.     How would your answer to (b) change if you learned that foreign central banks had purchased $600 million of Pecunian assets in 2016? How would these official purchases enter foreign balance of payments account?

Ans. – If foreign central banks purchased $600 million in domestic assets, then there is a surplus of

$100 million which must be offset somehow in the balance of payments. It will show up as an increase in the Pecunian central bank’s foreign reserves, or ORS = – $100 million. The central bank “imports” foreign reserves.